If you missed Sunday
afternoon CNN’s two-hour IOUSA Solutions broadcast, you can watch a 30-minute
version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the
occasional video clips of President Obama discussing the debt crisis. The
problem is a build up over spending for most of our nation’s history, It landed
at the feet of President Obama, but he’s certainly not the cause nor is his the
recent expansion of health care coverage the real cause.

One take home from
the CNN show was that over 60% of the booked National Debt increases are funded
off shore (largely in Asia and the Middle East).
This going to greatly constrain the global influence and economic choices of the
United States.

By 2016 the interest
payments on the National Debt will be the biggest single item in the Federal
Budget, more than national defense or social security. And an enormous portion
of this interest cash flow will be flowing to foreign nations that may begin to
put all sorts of strings on their decisions to roll over funding our National
Debt.

The unbooked entitlement obligations that are not part of the National Debt are
over $60 trillion and exploding exponentially. The Medicare D entitlements to
retirees like me added over $8 trillion of entitlements under the Bush
Presidency.

Most of the problems
are solvable except for the Number 1 entitlements problem --- Medicare.
Drastic measures must be taken to keep Medicare sustainable.

I thought the show
was pretty balanced from a bipartisan standpoint and from the standpoint of
possible solutions.

Many of the possible
“solutions” are really too small to really make a dent in the problem. For
example, medical costs can be reduced by one of my favorite solutions of
limiting (like they do in Texas) punitive damage recoveries in malpractice
lawsuits. However, the cost savings are a mere drop in the bucket. Another drop
in the bucket will be the achievable increased savings from decreasing medical
and disability-claim frauds. These are important solutions, but they are not
solutions that will save the USA.

The big possible
solutions to save the USA are as follows (you and I won’t particularly like
these solutions):

Extend retirement age significantly
(75 years maybe?).
When Social Security was enacted, life expectancy was slightly over 65 years
of age.
Now it is well over 75 years of age.

Hit Medicare retirees like me with
higher fees for physicians, hospital services, and Medicare D drug payments.
Perhaps this should be on a scale based upon wealth/income levels such that
people, like me, who can afford to pay more must pay more.

Greatly curb the biggest cost of
Medicare --- keeping dying people alive in expensive hospitals for a few
weeks or maybe even a few months. Sometimes dying people must be kept alive
in ICU units costing over $10,000 per day when there is no hope of recovery.
There was not any hint of suggesting euthanasia as an alternative. But dying
people can be allowed to die more naturally and pain free.
http://www.cbsnews.com/video/watch/?id=5737437n&tag=mncol;lst;3
(wait for the commercials to play out)

Limit the National Debt is some way.
It’s now more common in Europe to limit national debt to 60% of GDP. Various
other means of constraining our National Debt were discussed in the CNN
longer version of the IOUSA Solutions video.

Here is the original (and somewhat dated video
that does not delve into solutions very much)IOUSA (the most frightening movie in American history) --- (see a 30-minute version of the documentary at
www.iousathemovie.com )

If you missed Sunday afternoon CNN’s two-hour IOUSA
Solutions broadcast, you can watch a 30-minute version at
http://www.pgpf.org/newsroom/press/IOUSA-Solutions-Premiers-on-CNN/
(Scroll Down a bit)
Note that great efforts were made to keep this a bipartisan panel along with the
occasional video clips of President Obama discussing the debt crisis. The
problem is a build up over spending for most of our nation’s history, It landed
at the feet of President Obama, but he’s certainly not the cause nor is his the
recent expansion of health care coverage the real cause.

Watch the World Premiere
of I.O.U.S.A.: Solutions on CNN
Saturday, April 10, 1:00-3:00 p.m. EST or Sunday, April 11, 3:00-5:00 p.m. EST

Featured Panelists
Include:

Peter G. Peterson, Founder and Chairman, Peter G. Peterson
Foundation

David Walker, President & CEO, Peter G. Peterson Foundation

Sen. Bill Bradley

Maya MacGuineas, President of the Committee for a Responsible
Federal Budget

Call it the fatal arithmetic of imperial
decline. Without radical fiscal reform, it could apply to America next.Niall Ferguson,
"An Empire at Risk: How Great Powers Fail," Newsweek MagazineCover Story, November 26, 2009 ---
http://www.newsweek.com/id/224694/page/1
Please note that this is NBC’s liberal Newsweek Magazine and not Fox News
or The Wall Street Journal.

.
. .

In other words, there
is no end in sight to the borrowing binge. Unless entitlements are cut or taxes
are raised, there will never be another balanced budget. Let's assume I live
another 30 years and follow my grandfathers to the grave at about 75. By 2039,
when I shuffle off this mortal coil, the federal debt held by the public will
have reached 91 percent of GDP, according to the CBO's extended baseline
projections. Nothing to worry about, retort -deficit-loving economists like Paul
Krugman.

.
. .

Another way of doing
this kind of exercise is to calculate the net present value of the unfunded
liabilities of the Social Security and Medicare systems. One recent estimate
puts them at about $104 trillion,
10 times the stated federal debt.

Niall Ferguson is the Laurence A. Tisch
professor of history at Harvard University and the author of The Ascent of
Money. In late 2009 he puts forth an unbooked discounted present
value liability of $104 trillion for Social Security plus Medicare. In late
2008, the former Chief Accountant of the United States Government, placed this
estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion
difference to President Obama's first year in office. We must accordingly
attribute the $61 trillion to margin of error and most economists would
probably put a present value of unbooked (off-balance-sheet) present value of
Social Security and Medicare debt to be somewhere between $43 trillion and $107
trillion To this we must add other unbooked present value of entitlement debt
estimates which range from $13 trillion to $40 trillion. If Obamacare passes it
will add untold trillions to trillions more because our legislators are not
looking at entitlements beyond 2019.

The Meaning of "Unbooked" versus "Booked" National Debt
By "unbooked" we mean that the debt is not included in the current "booked"
National Debt of $12 trillion. The booked debt is debt of the United States for
which interest is now being paid daily at slightly under a million
dollars a minute. Cash must be raised daily for interest payments. Cash is
raised from taxes, borrowing, and/or (shudder) the current Fed approach to
simply printing money. Interest is not yet being paid on the unbooked debt for
which retirement and medical bills have not yet arrived in Washington DC for
payment. The unbooked debt is by far the most frightening because our leaders
keep adding to this debt without realizing how it may bring down the entire
American Dream to say nothing of reducing the U.S. Military to almost nothing.

This matters more for
a superpower than for a small Atlantic island for one very simple reason. As
interest payments eat into the budget, something has to give—and that something
is nearly always defense expenditure. According to the CBO, a significant
decline in the relative share of national security in the federal budget is
already baked into the cake. On the Pentagon's present plan, defense spending is
set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6
percent of GDP by 2028.

Over the longer run,
to my own estimated departure date of 2039, spending on health care rises from
16 percent to 33 percent of GDP (some of the money presumably is going to keep
me from expiring even sooner). But spending on everything other than health,
Social Security, and interest payments drops from 12 percent to 8.4 percent.

This is how empires
decline. It begins with a debt explosion.
It ends with an inexorable reduction in the resources available for the Army,
Navy, and Air Force. Which is why voters are right to worry about America's debt
crisis. According to a recent Rasmussen report, 42 percent of Americans now say
that cutting the deficit in half by the end of the president's first term should
be the administration's most important task—significantly more than the 24
percent who see health-care reform as the No. 1 priority. But cutting the
deficit in half is simply not enough. If the United States doesn't come up soon
with a credible plan to restore the federal budget to balance over the next five
to 10 years, the danger is very real that a debt crisis could lead to a major
weakening of American power.

An urgency to rein in budget deficits seems to be
gaining some traction among American lawmakers. If so, it is none too soon.
Perceptions of a large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public
during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and
long-term interest rates, the typical symptoms of fiscal excess, have
remained remarkably subdued. This is regrettable, because it is fostering a
sense of complacency that can have dire consequences.

The roots of the apparent debt market calm are
clear enough. The financial crisis, triggered by the unexpected default of
Lehman Brothers in September 2008, created a collapse in global demand that
engendered a high degree of deflationary slack in our economy. The very
large contraction of private financing demand freed private saving to
finance the explosion of federal debt. Although our financial institutions
have recovered perceptibly and returned to a degree of solvency, banks,
pending a significant increase in capital, remain reluctant to lend.

Beneath the calm, there are market signals that do
not bode well for the future. For generations there had been a large buffer
between the borrowing capacity of the U.S. government and the level of its
debt to the public. But in the aftermath of the Lehman Brothers collapse,
that gap began to narrow rapidly. Federal debt to the public rose to 59% of
GDP by mid-June 2010 from 38% in September 2008. How much borrowing leeway
at current interest rates remains for U.S. Treasury financing is highly
uncertain.

The U.S. government can create dollars at will to
meet any obligation, and it will doubtless continue to do so. U.S. Treasurys
are thus free of credit risk. But they are not free of interest rate risk.
If Treasury net debt issuance were to double overnight, for example, newly
issued Treasury securities would continue free of credit risk, but the
Treasury would have to pay much higher interest rates to market its newly
issued securities.

In the wake of recent massive budget deficits, the
difference between the 10-year swap rate and 10-year Treasury note yield
(the swap spread) declined to an unprecedented negative 13 basis points this
March from a positive 77 basis points in September 2008. This indicated that
investors were requiring the U.S. Treasury to pay an interest rate higher
than rates that prevailed on comparable maturity private swaps.

(A private swap rate is the fixed interest rate
required of a private bank or corporation to be exchanged for a series of
cash flow payments, based on floating interest rates, for a particular
length of time. A dollar swap spread is the swap rate less the interest rate
on U.S. Treasury debt of the same maturity.)

At the height of budget surplus euphoria in 2000,
the Office of Management and Budget, the Congressional Budget Office and the
Federal Reserve foresaw an elimination of marketable federal debt securities
outstanding. The 10-year swap spread in August 2000 reached a record 130
basis points. As the projected surplus disappeared and deficits mounted, the
10-year swap spread progressively declined, turning negative this March, and
continued to deteriorate until the unexpected euro-zone crisis granted a
reprieve to the U.S.

The 10-year swap spread quickly regained positive
territory and by June 14 stood at a plus 12 basis points. The sharp decline
in the euro-dollar exchange rate since March reflects a large, but
temporary, swing in the intermediate demand for U.S. Treasury securities at
the expense of euro issues.

The 10-year swap spread understandably has emerged
as a sensitive proxy of Treasury borrowing capacity: a so-called canary in
the coal mine.

I grant that low long-term interest rates could
continue for months, or even well into next year. But just as easily,
long-term rate increases can emerge with unexpected suddenness. Between
early October 1979 and late February 1980, for example, the yield on the
10-year note rose almost four percentage points.

In the 1950s, as I remember them, U.S. federal
budget deficits were no more politically acceptable than households spending
beyond their means. Regrettably, that now quaint notion gave way over the
decades, such that today it is the rare politician who doesn't run on
seemingly costless spending increases or tax cuts with borrowed money. A low
tax burden is essential to maintain America's global competitiveness. But
tax cuts need to be funded by permanent outlay reductions.

The current federal debt explosion is being driven
by an inability to stem new spending initiatives. Having appropriated
hundreds of billions of dollars on new programs in the last year and a half,
it is very difficult for Congress to deny an additional one or two billion
dollars for programs that significant constituencies perceive as urgent. The
federal government is currently saddled with commitments for the next three
decades that it will be unable to meet in real terms. This is not new. For
at least a quarter century analysts have been aware of the pending surge in
baby boomer retirees.

We cannot grow out of these fiscal pressures. The
modest-sized post-baby-boom labor force, if history is any guide, will not
be able to consistently increase output per hour by more than 3% annually.
The product of a slowly growing labor force and limited productivity growth
will not provide the real resources necessary to meet existing commitments.
(We must avoid persistent borrowing from abroad. We cannot count on
foreigners to finance our current account deficit indefinitely.)

Only politically toxic cuts or rationing of medical
care, a marked rise in the eligible age for health and retirement benefits,
or significant inflation, can close the deficit. I rule out large tax
increases that would sap economic growth (and the tax base) and accordingly
achieve little added revenues.

With huge deficits currently having no evident
effect on either inflation or long-term interest rates, the budget
constraints of the past are missing. It is little comfort that the dollar is
still the least worst of the major fiat currencies. But the inexorable rise
in the price of gold indicates a large number of investors are seeking a
safe haven beyond fiat currencies.

The United States, and most of the rest of the
developed world, is in need of a tectonic shift in fiscal policy.
Incremental change will not be adequate. In the past decade the U.S. has
been unable to cut any federal spending programs of significance.

I believe the fears of budget contraction inducing
a renewed decline of economic activity are misplaced. The current spending
momentum is so pressing that it is highly unlikely that any politically
feasible fiscal constraint will unleash new deflationary forces. I do not
believe that our lawmakers or others are aware of the degree of impairment
of our fiscal brakes. If we contained the amount of issuance of Treasury
securities, pressures on private capital markets would be eased.

Continued in article

We're bringing
oil to American shores.
British Petroleum Advertisement, 1999

Fifty-seven days. For nearly two months Americans
have watched the nation’s largest environmental disaster unfold in the Gulf
of Mexico. It may not be at the forefront of every American’s mind as we
head into the busy summer months, with the preoccupation of keeping children
amused and planning vacations. But the images of helpless wildlife entombed
in tarry crude, the heartbreaking stories of countless livelihoods lost, and
the irritating nattering of incompetent politicians finally took their toll.

The President realized he could not allow the
out-of-control oil spill and its ensuing public relations disaster to
continue to drag down the public’s confidence in his leadership. And so he
decided to use one of the president’s most powerful tools: an address to the
nation.

Although it has lost much of its influence (and
audience) over the decades, there is still a sense of importance amongst
viewers when a president interrupts the normal course of America’s mundane
activities to address the nation. Just over 32 million Americans tuned in
for President Obama’s 18-minute address on Tuesday evening. Finally, the
country’s leader would provide some clarity and direction in the midst of
the quagmire.

Instead, Americans heard a lecture about their
gluttonous consumption of energy and an embarrassing attempt to shift blame
from a floundering administration.

The President began his remarks by likening the oil
spill to a battle, with the oil “assaulting our shores and our citizens.” It
seemed an odd analogy to use when the nation is fighting a real war against
terrorists—terrorists who have increased their attacks on America in the
last two years. For an administration that bends over backwards to
accommodate the “rights” of terrorist suspects, likening an environmental
“siege” to war plants further questions in the minds of citizens about how
seriously the war against terrorism is regarded by this president.

Notably missing in the President’s remarks about
his administration’s response to the spill was any concrete solution to
fixing the leaking oil well. Apparently the President moved from the
action-oriented “plug the damn hole” to passively seeking “ideas and advice”
from “scientists at our national labs and experts from academia and other
oil companies.” There was no explanation as to why, two months on, American
ingenuity has failed to stop the oil flow. Perhaps it was because true
American ingenuity has been stymied by bureaucratic, arcane policies and
laws. A simple search of YouTube videos shows some rather interesting ideas
for fixing the problem and cleaning up its mess.

The address quickly turned from glossing over the
administration’s mishandling to a beat down of BP. It’s true that BP should
be held accountable for damages resulting from their oil spill. But when the
President asserted, “We will make BP pay for the damage their company has
caused,” it sounded like a promise based in vengeance rather than justice.
President Obama’s vilification of BP is an attempt at deflection from his
own mistakes; his frustration will be absolved in their humiliation. At a
time of national crisis, Americans look to their president to provide
assurance and direction. The last thing they expect to hear is a
politically-motivated address that chides them for using natural resources
to achieve prosperity. But on Tuesday evening, America walked into an
intervention, lead by its Commander-in-Chief, for its “addiction to fossil
fuels.” It was as though the Oval Office was the setting for an episode of
Dr. Drew’s Celebrity Rehab.

As if labeling America an addict wasn’t bad enough,
the President then held up Communist China as a model for developing a green
economy. Never mind the fact China actually leads the world in carbon
dioxide emissions and is the second highest consumer of oil. Has a President
ever so blatantly compared America to a repressive Communist government,
with America considered the inferior nation?

The last quarter of the address was spent selling
America on the next item on the President’s policy agenda: increased
environmental regulations. Instead of providing real direction and
leadership, President Obama traded the power and mystique of the presidency
for political gain. He placed his agenda ahead of the best interests of the
nation. How shocking for a president to use his bully pulpit to admonish
instead of inspire.

The President: Good evening. As we speak, our
nation faces a multitude of challenges. At home, our top priority is to
recover and rebuild from a recession. Abroad, our brave men and women in
uniform are taking the fight to al Qaeda wherever it exists. Tonight, I want
to speak with you about a battle we're waging against an enemy that is
assaulting the very homes our citizens live in.

In September 2008, Fannie Mae and Freddie Mac
imploded when their losses became unsustainable. In part because so many of
our financial institutions relied on mortgage-backed securities based on bad
loans, a housing crisis exploded into a financial crisis. And Americans
continue to suffer from the effects. Unlike a hurricane or oil spill, where
the damage is obvious to the eye, the damage wrought by Fannie and Freddie
is much more insidious. As president, I have many smart people in my
administration. But you do not need a Nobel Prize to know the problem here.

Fannie and Freddie bought mortgages offered by
banks, which it then resold as mortgaged-backed securities. Banks liked
this, because it meant more money to lend. In the name of enabling ever more
Americans to own their homes, and encouraged by Congress, Fannie and Freddie
expanded into ever more risky mortgages. In the end, these two companies
helped send billions in loans to Americans who lacked the means to pay them
back—while spreading risk throughout our financial system.

Think of these bad loans as a nasty leak polluting
our financial system. While most other large financial firms either have
failed or are now recovering, the damage caused by Fannie and Freddie
continues largely unabated. The Congressional Budget Office says that
plugging these bad loans has already cost taxpayers $145.9 billion, making
them the single largest bailout of all.

Make no mistake: We will fight Fannie and Freddie
with everything we have got for as long as it takes. We will make these two
government-created companies pay for the damage they have caused. In fact,
we are going to make Fannie and Freddie pay with their lives. Tonight I'd
like to lay out our battle plan going forward:

First, the cleanup. For more than three decades
there's been a culture of corruption in the regulatory oversight of these
companies. I inherited a situation in which these firms lobbied and captured
their regulators. Fannie and Freddie's privileged place in the market was
sustained because they were a source of riches for Washington's Republican
and Democratic establishments. Even today we see this oily alliance at work
in the recent decision by Congress to exempt Fannie and Freddie from their
financial reform bill.

Tonight I promise you: We will do whatever it
takes, for as long as it takes, to change this.

One of the lessons we've learned from Fannie and
Freddie is that you cannot combine private profit with taxpayers bearing
risk. For decades we've propped up Fannie and Freddie's near monopoly. And
for decades we have failed to face up to the fact that homeownership is not
the best path for everyone. Time and again, reform has been blocked by
former congressmen of both parties whom these companies hired to spread the
money around and persuade Congress to back off.

So the second thing I will do is meet with the
chairmen of Fannie Mae and Freddie Mac. And I will tell them the day of
reckoning has come. We are going to break up Fannie and Freddie and end the
privileges they enjoy from the government.

You know, for generations, Americans have scrimped
and saved to provide a better life for their families. That is now in
jeopardy. I have met with moms and dads who bought modest houses that were
within their means—and now find their tax dollars going to bail out
neighbors who bought bigger houses not within their means. I have stood with
retirees whose pensions have been devastated. And I have sat in the living
rooms of families who now face foreclosure on homes they were falsely
assured they could afford.

The sadness and the anger they feel is not just
about the money they've lost. It's about a wrenching anxiety that their way
of life may be lost. I am a prayerful man. But I do not believe that the
American people should have to pray that their own government isn't
undermining their homes, their savings, and the lives they have built for
their families.

The financial crisis was not caused by Fannie and
Freddie alone. But fixing them is essential. To this important task, we
bring hope, which comes from the confidence that free men and women in a
free economy will in the end make better decisions than any government. And
tonight we revive that hope by delivering change to two of the fattest cats
Washington has ever known.

The White House and Congressional Democrats like to
talk about their battle against "Wall Street lobbyists," but it's the rest
of the economy that could use a few more advocates inside the Beltway. As
Congressional negotiators prepare their final draft of new financial
regulations, the potential impact on nonfinancial companies is striking.

To be clear, not all of the profound changes coming
soon to American business will be bad. This week the conference committee
responsible for merging House and Senate bills agreed to save the smallest
public companies from some of Washington's worst red tape. Companies below
$75 million in market value will no longer have to comply with the
Sarbanes-Oxley law's infamous Section 404(b).

At enormous cost for questionable benefit, this law
forces companies to pay accountants to do a second, highly intrusive audit
on top of the traditional financial audit. The new exemption for smaller
companies is a win for U.S. competitiveness and particularly for the
innovative young companies that create jobs.

However, some of those savings from lower fees
to accountants might simply go to plaintiffs lawyers. Yesterday we lauded Barney Frank for playing against
type and pushing for a free market in credit ratings. But just as we were
cheering his break-out performance, on Thursday the Massachusetts
Congressman added to the House proposal a measure to overturn the Supreme
Court's 2008 Stoneridge decision. He did so out of nowhere, and with several
lawmakers absent from the meeting room.

The Frank provision would allow trial lawyers to
launch suits not just against companies that commit securities fraud, but
also against other companies that didn't defraud investors but did business
with the alleged fraudsters. Senator Arlen Specter had tried to get this
trial-lawyer bonanza into the Senate bill, to no avail, and the House hadn't
included it either. Yet Thursday night it remained close to reaching the
President's desk as Senators mulled whether to accept Mr. Frank's proposal.
An alternative authorizing a study by the Government Accountability Office
still had a chance to win the day instead.

Meanwhile, the conferees next week will likely sign
off on the details of the Bureau of Consumer Financial Protection, a
regulator with independent rule-writing authority, the freedom to set its
own budget and consume up to 12% of the earnings of the Federal Reserve
system, and no responsibility to protect the safety and soundness of the
institutions it regulates.

When we say "institutions," you might naturally
think we're talking about huge banks, but the jurisdiction of this
regulatory beast will be limited only by the imagination of the Obama
Administration. Not only is there no bank in the country too small to be
subject to its rules, but any business that charges customers to extend
credit could also fall under the new bureaucracy's ambit.

Supporters of this new regulator say small
businesses will be exempt, but the bill says the definition of "small" will
be set by the Small Business Administration. For most retailers, the SBA's
current level is $7 million in annual revenues, but under the bill that
number can be changed without an act of Congress. Any business that charges
a fee to customers who don't pay within 90 days could get this regulatory
scrub.

This new regulator will decide whether such fees,
and almost all financial products and services outside the securities and
insurance industries, are "unfair, deceptive, or abusive." Yes, you read
that correctly. This central element of "Wall Street reform" will not touch
the securities industry, but it could hit dental practices and
home-renovation companies that allow their customers to pay in installments.

What does "abusive" mean? We'll all find out after
the President signs this bill and the regulators begin to make their
judgments. The rule-making will be intense, because the pending bill hands
to this new consumer czar the responsibility for interpreting a host of
existing banking laws focused on consumer access to credit. This new
regulator will not have authority over the infamous Community Reinvestment
Act, which did so much to encourage risky but politically popular lending
prior to the credit crisis. But the consumer czar will write the rules for a
host of similar laws ostensibly created to encourage fair and truthful
lending.

This is what has small banks terrified. Think back
to the housing boom with banking regulators enforcing affordable housing
goals and encouraging lending to allegedly under-served populations. Now
imagine such regulators pursuing similar goals, except with no obligation to
safeguard the financial health of the lender.

We're told there is little chance Democrats will
change any of this, which means that small banks and creditors will soon be
subject to even greater whims of regulatory chance. And all sold to you in
the name of punishing Wall Street.

Around the turn of every year, bankers can think of
only one thing: the size of their bonuses.

Even beyond bonus season, they run different
scenarios and assumptions, trying to calculate their number.

This distracts them so much that the bigger the
bonus at stake, the worse the performance, according to behavioral economist
Dan Ariely, who lays out his theory in his new book "The Upside of
Irrationality" (HarperCollins, $27.99).

"For a long time we trained bankers to think they
are the masters of the universe, have unique skills and deserve to be paid
these amounts," said Ariely, who also wrote the New York Times bestseller
"Predictably Irrational."

"It is going to be hard to convince them that they
don't really have unique skills and that the amount they've been paid for
the past years is too much."

Ariely's findings come as regulators try to rein in
Wall Street's bonus culture after the 2008 financial collapse. The financial
industry argues it needs to pay large bonuses to attract and motivate its
top employees.

In an experiment in India, Ariely measured the
impact of different bonuses on how participants did in a number of tasks
that required creativity, concentration and problem-solving.

One of the tasks was Labyrinth, where the
participants had to move a small steel ball through a maze avoiding holes.
Ariely describes a man he identified as Anoopum, who stood to win the
biggest bonus, staring at the steel ball as if it were prey.

"This is very, very important," Anoopum mumbled to
himself. "I must succeed." But under the gun, Anoopum's hands trembled
uncontrollably, and he failed time after time.

A large bonus was equal to five months of their
regular pay, a medium-sized bonus was equivalent to about two weeks pay and
a small bonus was a day's pay.

There was little difference in the performance of
those receiving the small and medium-sized bonuses, while recipients of
large bonuses performed worst.

SHOCK TREATMENT

More than a century ago, an experiment with rats in
a maze rigged with electric shocks came to a similar conclusion. Every day,
the rats had to learn how to navigate a new maze safely.

When the electric shocks were low, the rats had
little incentive to avoid them. At medium intensity they learned their
environment more quickly.

But when the shock intensity was very high, it
seemed the rats could not focus on anything other than the fear of the
shock.

This may provide lessons for regulators who want to
change Wall Street's bonus culture, Ariely said. Paying no bonus or smaller
bonuses could help fix skewed incentives without loss of talent.

"The reality is, a lot of places are able to
attract great quality people without paying them what bankers are paid,"
Ariely said. "Do you think bankers are inherently smarter than other people?
I don't." (Reporting by Kristina Cooke; Editing by Daniel Trotta)

My interest in the irrationality of human behavior
started many years ago in hospital after I had been badly burned. If you
spend three years in a hospital with 70% of your body covered in burns, you
are bound to notice several irrationalities. The one that bothered me in
particular was the way my nurses would remove the bandage that wrapped my
body. Now, there are two ways to remove a bandage. You can rip it off
quickly, causing intense but short-term pain. Or you can remove it slowly,
causing less intense pain but for a longer time.

My nurses believed in the quick method. It was
incredibly painful, and I dreaded the moment of ripping with remarkable
intensity. I begged them to find a better way to do this, but they told me
that this was the best approach and that they knew the best way for removing
bandages. It was their intuition against mine, and they chose theirs.
Moreover, they thought it unnecessary to test what appeared (to them) to be
intuitively right.

After leaving the hospital, I started doing
experiments that simulated these two ripping methods. And I found that the
nurses were wrong: Quick ripping turned out to be more painful than slow
ripping. In my experiments, I discovered a collection of tricks that could
have been used to lessen the pain or manage it more effectively. For
instance, they could have started from the most painful part of the
treatment and moved to less painful areas to give me a sense of improvement;
they could have given me breaks in between to recover. There are great
lessons to be learned from such experiments, lessons that apply to
economics, markets, policymaking and even our personal lives.

Is there an idea you believe can change the world?
Describe it in the comments section at the bottom of this story, and Forbes
could publish your idea.

As it turns out, it is not that useful, and
sometime even costly, to base our decisions on our intuitions. Instead, we
need to inject some science in the way we go about everyday life because if
one merely keeps following his instincts, he will continue making the same
(preventable) mistakes.

Over the years, I have examined many topics related
to the mistakes we all make when we make decisions, and one topic that I
have explored in some depth is that of cheating behavior, and I would like
to describe this in a bit more depth.

Here’s Daniel Pink’s latest book. This time he presents theories on
motivation. This clever YouTube clip is a great animation explaining a point
made in the book.
Bill Ellis, CPA, MPAccFurman UniversityAccounting UES
864-908-4743

June 19, 2010
reply from Bob Jensen

Hi Bill,

What a great animation video that makes such good points about
compensation.

When Adolf Hitler was building up the Nazi movement
in the 1920s, leading up to his taking power in the 1930s, he deliberately
sought to activate people who did not normally pay much attention to
politics. Such people were a valuable addition to his political base, since
they were particularly susceptible to Hitler's rhetoric and had far less
basis for questioning his assumptions or his conclusions.

"Useful idiots" was the term supposedly coined by
V.I. Lenin to describe similarly unthinking supporters of his dictatorship
in the Soviet Union.

Put differently, a democracy needs informed
citizens if it is to thrive, or ultimately even survive. In our times,
American democracy is being dismantled, piece by piece, before our very eyes
by the current administration in Washington, and few people seem to be
concerned about it.

The president's poll numbers are going down because
increasing numbers of people disagree with particular policies of his, but
the damage being done to the fundamental structure of this nation goes far
beyond particular counterproductive policies.

Just where in the Constitution of the United States
does it say that a president has the authority to extract vast sums of money
from a private enterprise and distribute it as he sees fit to whomever he
deems worthy of compensation? Nowhere.

And yet that is precisely what is happening with a
$20 billion fund to be provided by BP to compensate people harmed by their
oil spill in the Gulf of Mexico.

Many among the public and in the media may think
that the issue is simply whether BP's oil spill has damaged many people, who
ought to be compensated. But our government is supposed to be "a government
of laws and not of men." If our laws and our institutions determine that BP
ought to pay $20 billion-- or $50 billion or $100 billion-- then so be it.

But the Constitution says that private property is
not to be confiscated by the government without "due process of law."
Technically, it has not been confiscated by Barack Obama, but that is a
distinction without a difference.

With vastly expanded powers of government available
at the discretion of politicians and bureaucrats, private individuals and
organizations can be forced into accepting the imposition of powers that
were never granted to the government by the Constitution.

If you believe that the end justifies the means,
then you don't believe in Constitutional government. And, without
Constitutional government, freedom cannot endure. There will always be a
"crisis"-- which, as the president's chief of staff has said, cannot be
allowed to "go to waste" as an opportunity to expand the government's power.

That power will of course not be confined to BP or
to the particular period of crisis that gave rise to the use of that power,
much less to the particular issues.

When Franklin D. Roosevelt arbitrarily took the
United States off the gold standard, he cited a law passed during the First
World War to prevent trading with the country's wartime enemies. But there
was no war when FDR ended the gold standard's restrictions on the printing
of money.

At about the same time, during the worldwide Great
Depression, the German Reichstag passed a law "for the relief of the German
people." That law gave Hitler dictatorial powers that were used for things
going far beyond the relief of the German people-- indeed, powers that
ultimately brought a rain of destruction down on the German people and on
others.

If the agreement with BP was an isolated event,
perhaps we might hope that it would not be a precedent. But there is nothing
isolated about it.

The man appointed by President Obama to dispense
BP's money as the administration sees fit, to whomever it sees fit, is only
the latest in a long line of presidentially appointed "czars" controlling
different parts of the economy, without even having to be confirmed by the
Senate, as Cabinet members are.

It's all too predictable.
A day after a gunman killed six people and wounded 18 others at Northern
Illinois University,The New York Times
criticizedthe U.S. Interior Department for
preparing to rethink its ban on guns in national parks.

The editorial board wants "the 51 senators who like
the thought of guns in the parks -- and everywhere else, it seems -- to
realize that the innocence of Americans is better protected by carefully
controlling guns than it is by arming everyone to the teeth."

As usual, the Times editors seem unaware of how
silly their argument is. To them, the choice is between "carefully
controlling guns" and "arming everyone to the teeth." But no one favors
"arming everyone to the teeth" (whatever that means). Instead, gun advocates
favor freedom, choice and self-responsibility. If someone wishes to be
prepared to defend himself, he should be free to do so. No one has the right
to deprive others of the means of effective self-defense, like a handgun.

As for the first option, "carefully controlling
guns," how many shootings at schools or malls will it take before we
understand that people who intend to kill are not deterred by gun laws? Last
I checked, murder is against the law everywhere. No one intent on murder
will be stopped by the prospect of committing a lesser crime like illegal
possession of a firearm. The intellectuals and politicians who make pious
declarations about controlling guns should explain how their gunless utopia
is to be realized.

While they search for -- excuse me -- their magic
bullet, innocent people are dying defenseless.

That's because laws that make it difficult or
impossible to carry a concealed handgun do deter one group of people:
law-abiding citizens who might have used a gun to stop crime. Gun laws are
laws against self-defense.

Criminals have the initiative. They choose the
time, place and manner of their crimes, and they tend to make choices that
maximize their own, not their victims', success. So criminals don't attack
people they know are armed, and anyone thinking of committing mass murder is
likely to be attracted to a gun-free zone, such as schools and malls.

Government may promise to protect us from
criminals, but it cannot deliver on that promise. This was neatly summed up
in book title a few years ago: "Dial 911 and Die." If you are the target of
a crime, only one other person besides the criminal is sure to be on the
scene: you. There is no good substitute for self-responsibility.

How, then, does it make sense to create mandatory
gun-free zones, which in reality are free-crime zones?

The usual suspects keep
calling for more gun control laws. Butthis idea that gun
control is crime control is just a myth. The
National Academy of Sciences reviewed dozens of studies and could not find a
single gun regulation that clearly led to reduced violent crime or murder.
When Washington, D.C., passed its tough handgun ban years ago, gun violence
rose.

The press ignores the fact that often guns save
lives.

It's what happened in 2002 at the Appalachian
School of Law. Hearing shots, two students went to their cars, got their
guns and restrained the shooter until police arrested him.

Likewise,
law professor Glen
Reynolds writes, "Pearl, Miss., school shooter
Luke Woodham was stopped when the school's vice principal took a .45 from
his truck and ran to the scene. In (last) February's Utah mall shooting, it
was an off-duty police officer who happened to be on the scene and carrying
a gun".

It's impossible to know exactly how often guns stop
criminals. Would-be victims don't usually report crimes that don't happen.
But people use guns in self-defense every day. The Cato Institute's Tom
Palmer says just showing his gun to muggers once saved his life.

The most memorable comedic take on the oil spill
disaster in the Gulf of Mexico hasn't come from "Saturday Night Live," ''The
Daily Show" or a late-night monologue.

Instead, a cheaply made video by an unlikely New
York improv troupe has created the only commentary that has truly resonated
online: a three-minute spoof that shows BP executives pathetically trying to
clean up a coffee spill.

In the video, BP execs are in the middle of a
meeting when someone overturns a coffee cup. The liquid oozes across the
conference table. One exec says it will "destroy all the fish" (his sushi
lunch); another says it's encroaching on his map of Louisiana. They try to
contain the coffee spill by wrapping their arms around the perimeter,
dumping garbage on top to absorb the liquid, clipping hair over it and other
stupid human tricks.

Three hours later, the spill remains with all the
mess left from attempts to contain it: paper, hair, soil, plants, etc.
Finally, they get Kevin Costner on the phone.

"He'll know what to do for sure," an exec says with
great hope.

"Do you have a golf ball?" Costner asks. No. A
pingpong ball? Yes. Costner tells them to throw it at the spill. They do.
Nothing happens. Then: 47 days later. The spill and the mess are still there
with BP execs no closer to a solution.

In the last two weeks, the video has been watched
by nearly 7 million people on YouTube. By the count of Viral Video Chart,
it's been shared some 300,000 times on blogs, Facebook pages and Twitter
feeds.

The video was dreamed up by the writers for the
sketch show "Beneath Gristedes," a monthly stage show at the Upright
Citizens Brigade Theatre in New York. While meeting to work on the show, a
germ of the concept came to Erik Tanouye, who worked out the script with
fellow writers John Frusciante, Gavin Spieller and Eric Scott.

They shot it two days later and within a week, it
was up on UCBComedy.com. The site has had some viral hits -- a parody of a
Google ad, a spoof of the "David After the Dentist" video -- but nothing on
this level. UCBComedy.com's servers immediately crashed under the traffic.

"I couldn't do my day job," said Tanouye, 32, who
is the director of student affairs for the UCB training center.

It's been the biggest hit yet for UCBComedy.com,
which was founded in 2007 to give its performers an online outlet. The
Upright Citizens Brigade Theatre, which has popular theaters in New York and
Los Angeles, was co-founded by Amy Poehler.

For more than a decade, it has regularly churned
out exciting young comic talent, including "SNL" players Bobby Moynihan and
Jenny Slate, and "Office" regular Zach Woods. Young audiences line up on a
nightly basis to pack the 300-seat New York theater, which has a youthful,
collegiate vibe.

"What we're trying to do with videos is get out
there to the general public the talent that we have," says Todd Bieber, 30,
the website's director of content and production. "We can reach New York and
L.A. audiences pretty easily, but there's a whole world out there that we
can't reach through the theaters."

The boost in visitors to the site has been
considerable. From May 21-June 21 last year, the site drew just under
43,000; the same period this year has attracted more than 450,000.

But Bieber, who formerly worked at the Onion News
Network, is the only one being paid to work full time on the site. Videos
don't have anything like the budgets of the Onion News Network, which shoots
in the style of real news broadcasts.

UCBComedy.com includes a lot of footage of improv
performances, which typically have much more energy in person, where the
thrill of instant creation is immediate. But the dozens of UCB performers --
who are graduates of the theater's improv training classes -- have learned
to fashion their comedy to the Web.

"Beta teams" -- performers dedicated to producing
content for the site -- were formed in January. Original series have been
created, including one called "Blackouts," which are short 30-second bites,
one punch line at a time.

Bieber says that a viral sensation such as "BP
Spills Coffee" can "energize the UCB community" in creating video for the
website. Having so much talent at the ready makes UCBComedy.com a little
like an amateur version of FunnyOrDie.com, the comedy site co-founded by
Will Ferrell and Adam McKay, which pulls contributions from famous
comedians.

"That's the hope," says Bieber. "There are so many
terribly ridiculous things going on in the world that there's plenty of room
for commentary. If we can be looked in the same way as FunnyOrDie, that
would be terrific. We'd love to get the hits that they do."

There's plenty of competition when it comes to
topical humor, though, and the oil spill has been a common topic. The
slow-motion horror of the spill is utterly serious, but people have long
turned to comics to give voice to rage. BP, which is said to have mismanaged
the spill, has been an easy target.

David Letterman, Jay Leno and other late-night
hosts have made BP jokes practically a nightly feature. Conan O'Brien,
perhaps feeling like he was missing out, recently tweeted: "The past 2
months I've been on tour and haven't followed the news. What's with all the
photos of chocolate pelicans?"

"The Colbert Report" and "The Daily Show" have
battered the subject relentlessly. Mixing comedy with activism, Colbert
Nation has launched a "Gulf of America Fund" to raise donations for the
recovery efforts. "SNL" is off for the summer and so has missed the
opportunity to lampoon BP.

One of the more interesting Internet-based parodies
has been a mock Twitter feed, purporting to be from BP's public relations
department: http://twitter.com/BPGlobalPR. It has more than 175,000
followers. One example: "Investing a lot of time & money into cleaning up
our image, but the beaches are next on the to-do list for sure."

But the success of the UCB's video could well be a
firm foothold in the world of online comedy, and boost the troupe's national
presence.

"People can see these amazing talents come up,"
says Bieber. "As awesome as the theater is, at the end of the day, that
sketch would have killed for 200 or 300 people, not 6 or 7 million."

As a lifelong Democrat and public servant to four
presidents, I had hoped the financial reform bill would be the best example
of my party's long-standing reputation for standing on the side of
individual investors.

It's not. The bill, already weakened by deal-making
as it emerged from the Senate, has been bled dry of nearly every meaningful
protection of investors.

Ironically, the authors of this bill are the same
Democrats who normally would have opposed many of its features if they were
in the minority. Now in the majority, these politicians are investor
advocates in their press releases alone.

The Democrats had the chance to do this bill the
right way. They should have been motivated by Congress's previous failure to
adopt meaningful reform, which left investors unprepared for the crisis. And
they had the input of talented leaders and experts who attempted to help
lawmakers deal with systemic risk and gaps in basic investor protections.

Whatever these positive contributions, Congress
more than overwhelmed them with sins of commission and sins of omission. One
of many bad ideas that made it into the bill: Public companies will now have
a wider loophole to avoid doing internal audits investors can trust. This
requirement was the most important pro-investor reform of the last decade,
and it worked. Of the 522 U.S. financial restatements in 2009, 374 were at
small firms not subject to auditor reviews.

But the reform bill about to be passed expands the
number of small companies exempt from Sarbanes-Oxley audit requirements.
When fraud is happening at a public company, small or large, investors care.
Now, thanks to Democratic leadership, investors are less likely to know.

There are many missed opportunities in this bill,
but these are the biggest:

First, Democratic leaders in Congress failed to
revoke the 1975 law that prevents municipal bond issuers from facing the
kind of regulation and scrutiny of the corporate bond market. If the
municipal bond market melts down in the next few years, we'll know who to
blame.

Second, they failed to pass a meaningful
majority-vote or proxy access rule for corporate ballots. Instead, thanks to
Sen. Chris Dodd (D., Conn.), the Senate passed a proxy access rule that is
comically useless: You need 5% of shares to get on the proxy. Very rarely do
investors assemble such large stakes in any company.

Third, New York Sen. Chuck Schumer's wise idea to
let the Securities and Exchange Commission (SEC) become a self-funded agency
will likely be killed by appropriators who are unwilling to give up the
power of the purse.

Fourth, Democratic leaders left in place the
confusing dual regulatory structure of the SEC and the Commodity Futures
Trading Commission. A merger was necessary to eliminate regulatory arbitrage
and corrosive bureaucratic turf battles, yet it didn't happen.

Fifth, Senate Democrats failed to support Rep.
Barney Frank's (D., Mass.) effort to pass a new law to overcome the legal
precedent of the 2008 Supreme Court's Stoneridge decision, which allows
third-party consultants, accountants and other abettors of fraud to avoid
liability. Again, another sellout of investor interests.

Sixth, Congress didn't deal with the massive
problems of Fannie Mae and Freddie Mac. It's one thing to fail to see
trouble before it happens. Now, there's no excuse. The central role played
by these two organizations in the financial crisis is indisputable. Congress
had a chance to fully restrict these agencies from anything but the most
basic market-making activities, and it didn't.

Finally, Democrats could have proposed a law
obligating investment advisers to serve their clients' interests above all
others. That was in the House version of the bill, but the Senate punted the
idea, and it's is likely to end up kicked down the road even further.

The sad reality is that we may not have a chance to
enact these kinds of reforms until after the next major financial crisis.
For those of us who champion the rights of investors, that's too long to
wait—especially since until very recently we didn't think we would have to.

Mr. Levitt, chairman of the Securities and Exchange Commission from
1993 to 2001, now serves as an adviser to the Carlyle Group and Goldman
Sachs.

I Saw Maxine Kissing Franklin Raines ---
http://www.youtube.com/watch?v=vbZnLxdCWkA
Before Franklin Raines resigned as CEO of Fannie Mae and paid over a million
dollar fine for accounting fraud to pad his bonus, he was the darling of the
liberal members of Congress. Frank Raines was creatively managing earnings to
the penny just enough to get his enormous bonus. The auditing firm of KPMG was
accordingly fired from its biggest corporate client in history ---
http://www.trinity.edu/rjensen/Theory01.htm#Manipulation

The Largest Earnings Management Fraud in History and Congressional
Efforts to Cover it Up

Without trying to place the blame on Democrats or Republicans, here are
some of the facts that led to the eventual fining of Fannie Mae
executives for accounting fraud and the firing of KPMG as the auditor on
one of the largest and most lucrative audit clients in the history of
KPMG. The restated earnings purportedly took upwards of a million
journal entries, many of which were re-valuations of derivatives being
manipulated by Fannie Mae accountants and auditors (Deloitte was charged
with overseeing the financial statement revisions.

Fannie Mae may have conducted the largest earnings management scheme in
the history of accounting.

.
. . flexibility also gave Fannie the ability to manipulate earnings
to hit -- within pennies -- target numbers for executive bonuses.
Ofheo details an example from 1998, the year the Russian financial
crisis sent interest rates tumbling. Lower rates caused a lot of
mortgage holders to prepay their existing home mortgages. And Fannie
was suddenly facing an estimated expense of $400 million.

Well, in its wisdom, Fannie decided to recognize only $200 million,
deferring the other half. That allowed Fannie's executives -- whose
bonus plan is linked to earnings-per-share -- to meet the target for
maximum bonus payouts. The target EPS for maximum payout was $3.23
and Fannie reported exactly . . . $3.2309. This bull's-eye was worth
$1.932 million to then-CEO James Johnson, $1.19 million to
then-CEO-designate Franklin Raines, and $779,625 to then-Vice
Chairman Jamie Gorelick.

That same year Fannie installed software that allowed management to
produce multiple scenarios under different assumptions that,
according to a Fannie executive, "strengthens the earnings
management that is necessary when dealing with a volatile book of
business." Over the years, Fannie designed and added software that
allowed it to assess the impact of recognizing income or expense on
securities and loans. This practice fits with a Fannie corporate
culture that the report says considered volatility "artificial" and
measures of precision "spurious."

This disturbing culture was apparent in Fannie's manipulation of its
derivative accounting. Fannie runs a giant derivative book in an
attempt to hedge its massive exposure to interest-rate risk.
Derivatives must be marked-to-market, carried on the balance sheet
at fair value. The problem is that changes in fair-value can cause
some nasty volatility in earnings.

So, Fannie decided to classify a huge amount of its derivatives as
hedging transactions, thereby avoiding any impact on earnings. (And
we mean huge: In December 2003, Fan's derivatives had a notional
value of $1.04 trillion of which only a notional $43 million was not
classified in hedging relationships.) This misapplication continued
when Fannie closed out positions. The company did not record the
fair-value changes in earnings, but only in Accumulated Other
Comprehensive Income (AOCI) where losses can be amortized over a
long period.

Fannie had some $12.2 billion in deferred losses in the AOCI balance
at year-end 2003. If this amount must be reclassified into retained
earnings, it might punish Fannie's earnings for various periods over
the past three years, leaving its capital well below what is
required by regulators.

In all, the Ofheo report notes, "The misapplications of GAAP are not
limited occurrences, but appear to be pervasive . . . [and] raise
serious doubts as to the validity of previously reported financial
results, as well as adequacy of regulatory capital, management
supervision and overall safety and soundness. . . ." In an agreement
reached with Ofheo last week, Fannie promised to change the methods
involved in both the cookie-jar and derivative accounting and to
change its compensation "to avoid any inappropriate incentives."

But we don't think this goes nearly far enough for a company whose
executives have for years derided anyone who raised a doubt about
either its accounting or its growing risk profile. At a minimum
these executives are not the sort anyone would want running the U.S.
Treasury under John Kerry. With the Justice Department already
starting a criminal probe, we find it hard to comprehend that the
Fannie board still believes that investors can trust its management
team.

Fannie Mae isn't an ordinary company and this isn't a
run-of-the-mill accounting scandal. The U.S. government had no
financial stake in the failure of Enron or WorldCom. But because of
Fannie's implicit subsidy from the federal government, taxpayers are
on the hook if its capital cushion is insufficient to absorb big
losses. Private profit, public risk. That's quite a confidence game
-- and it's time to call it.

Much has been
made of the accounting improprieties alleged by Fannie's regulator,
the Office of Federal Housing Enterprise Oversight.

Some investors
may even be aware the matter centers on the mortgage giant's $1
trillion "notional" portfolio of derivatives -- notional being the
Wall Street way of saying that that is how much those options and
other derivatives are worth on paper.

But
understanding exactly what is supposed to be wrong with Fannie's
handling of these instruments takes some doing. Herewith, an effort
to touch on what's what -- a notion of the problems with that
notional amount, if you will.

Ofheo alleges
that, in order to keep its earnings steady, Fannie used the wrong
accounting standards for these derivatives, classifying them under
complex (to put it mildly) requirements laid out by the Financial
Accounting Standards Board's rule 133, or FAS 133.

A Fannie
spokesman last week declined to comment on the issue of hedge
accounting for derivatives, but Fannie Mae has maintained that it
uses derivatives to manage its balance sheet of debt and mortgage
assets and doesn't take outright speculative positions. It also uses
swaps -- derivatives that generally are agreements to exchange
fixed- and floating-rate payments -- to protect its mortgage assets
against large swings in rates.

Under FAS 133, if
a swap is being used to hedge risk against another item on the
balance sheet, special hedge accounting is applied to any gains and
losses that result from the use of the swap. Within the application
of this accounting there are two separate classifications:
fair-value hedges and cash-flow hedges.

Fannie's
fair-value hedges generally aim to get fixed-rate payments by
agreeing to pay a counterparty floating interest rates, the idea
being to offset the risk of homeowners refinancing their mortgages
for lower rates. Any gain or loss, along with that of the asset or
liability being hedged, is supposed to go straight into earnings as
income. In other words, if the swap loses money but is being applied
against a mortgage that has risen in value, the gain and loss cancel
each other out, which actually smoothes the company's income.

Cash-flow
hedges, on the other hand, generally involve Fannie entering an
agreement to pay fixed rates in order to get floating-rates. The
profit or loss on these hedges don't immediately flow to earnings.
Instead, they go into the balance sheet under a line called
accumulated other comprehensive income, or AOCI, and are allocated
into earnings over time, a process known as amortization.

Ofheo claims
that instead of terminating swaps and amortizing gains and losses
over the life of the original asset or liability that the swap was
used to hedge, Fannie Mae had been entering swap transactions that
offset each other and keeping both the swaps under the hedge
classifications. That was a no-go, the regulator says.

"The major
risk facing Fannie is that by tainting a certain portion of the
portfolio with redesignations and improper documentation, it may
well lose hedge accounting for the whole derivatives portfolio,"
said Gerald Lucas, a bond strategist at Banc of America Securities
in New York.

The bottom line is that both the FASB and the IASB must someday soon
take another look at how the real world hedges portfolios rather than
individual securities. The problem is complex, but the problem has come
to roost in Fannie Mae's $1 trillion in hedging contracts. How the SEC
acts may well override the FASB. How the SEC acts may be a vindication
or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie
violate the rules of IAS 133.

This message from my good friend Cindy is off topic, but I think it may be
useful for you to check if the region around your home town has something
similar. This could be great advice to pass along to poor people. San Antonio is
one of the larger cities in the United States and certainly has its share of
residents (counted plus uncounted) below the poverty line.

However, that ranking is misleading, because San Antonio has insignificant
suburbs. San Antonio drops way down in rankings of metropolitan area population.
For example, San Antonio is larger than San Francisco unless you consider
Oakland and the Bay Area suburbs as part of San Francisco. Or is San Francisco
really a relatively small suburb of Oakland?

From: Mundy-Cobb,
Cynthia [mailto:Cynthia.Mundy@trinity.edu]Sent: Friday, June 25, 2010 4:01 PM
To: TIGERTALK Subject: City of San Antonio has a special program savings for
people with limited income.

Please pass this on to any individual that you
might know who may be able to make use of this program. The City’s
Individual Development Account – IDA program is a special match savings
program for people with limited income. For every dollar you save -up to
$1000 - the City of San Antonio (COSA) will match it with four dollars. ($4
to $1). See below for more information and link for this program.

There are also programs that assist people with
foreclosure counseling.

________________________________________

WHAT IS THE INDIVIDUAL DEVELOPMENT ACCOUNT PROGRAM
(IDA)?

The IDA Program is a special match savings program
for people with limited income. IDA members will receive extra dollars and
the tools needed to get a head start on building for their future by
attaining long term assets. These assets include gaining secondary education
and purchasing a home. For every dollar you save -up to $1000 - the City of
San Antonio (COSA) will match it with four dollars. ($4 to $1)

Thanks for the
message. We corresponded a while back about the stimulus payments in 2008.
We have an IDA program here in Hawaii that supports first time home buyers,
start up small businesses and post secondary education.

We have been trying to get the
program expanded to buying new cars, especially for people who live in rural
areas where there is no public transportation option which in Hawaii is
pretty much every island other than Oahu where Honolulu the 12th largest
city is located. The reason for the car purchase is so that people can get
to work and thus not fall deeper into poverty.

One of my past students was
the founding executive director of the initial IDA collaborative in Hawaii
and was a past volunteer with our school’s VITA program. We even had a
state law that granted a 50% tax credit, beyond the normal charitable
deduction, for amounts contributed to a Hawaii IDA program’s matching fund
from any for-profit corporation. Unfortunately that law sunsetted a couple
years ago and the financial mess we are all in pretty much guaranteed that
it was not reenacted.

As with most IDA programs
participants here need to accomplish certain things, in addition to making
their savings goals, like classes on financial aid applications (FASFA),
basics of running a business, financial literacy and asset building which
many of our school’s service learning students get to teach. Another great
thing about IDAs is that the matching contribution and the interest on the
match are not subject to income tax so the power of compounding is given
maximum effect.

A group of us are trying to
change our state’s public benefits laws so that IDAs will not count against
asset limitations ($2000 single and $3000 for married couples) for such
things as TANF (welfare) and SNAP (Supplementary Nutrition Assistance
Program or food stamps) so that the climb out of and off of public
assistance is not abruptly interrupted due to having engaged in such a
prudent and forward thinking actions as saving money.

Organizations like the Annie
E. Cassy Foundation as well as various state and federal grant programs
provide the matching funds so if you work with a non profit that serves the
poor and supports programs like VITA and financial literacy this is a great
addition that can draw additional friends and funders.